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Eye of the Emerging-Market Storm May Have Passed the Rand

(Bloomberg) -- The tide may have turned for South Africa’s battered rand.

The currency slumped 14 percent in the second quarter, its worst three-month period in more than six years, amid an emerging-market sell-off sparked by rising U.S. rates and escalating trade tensions. It didn’t help that South Africa’s economy is struggling to emerge from a contraction, leaving the central little room for policy tightening. And the euphoria that followed Cyril Ramaphosa’s election as president in February faded as he struggled to implement his reform agenda while appeasing populist elements in his own party.

Still, the rand has climbed 3.4percent since the beginning of July, the best performance among developing-nation peers after Argentina and Mexico’s pesos, even as the trade war between the U.S. and China escalated and the Federal Reserve signaled that its tightening path is on track.

“The big falls are behind us,” said John Ashbourne, a London-based Africa economist at Capital Economics. “They were partially due to general, EM-wide factors but also reflected the rand finding a more sustainable level following the unsustainable rally prompted by hopes that political change would improve the economic situation. We always thought that this optimism went a bit too far.”

Capital Economics forecasts the rand at 13.80 per dollar by the end of the year, a 3.4 percent decline from about 13.34 on Wednesday.

These four charts show why there’s reason for optimism about the rand:

Risk Reversals

Traders have cut bearish bets on the rand. The premium of options to sell the currency over those to buy it in the next three months, known as the 25-Delta risk reversal, fell to its lowest level since May 17 on Wednesday. Options volatility has also declined as traders anticipate the currency’s price swings moderating.

Moving Average

The rand is taking a stab at moving below its 50-day moving average for the first time since November 2017. Last time it did so, it gained about 13 percent against the dollar in four months. When the inverse happened in April, the rand sold off heavily.

Bond Buyers

After a record sell-off in the second quarter, which spanned 11 straight weeks of outflows, foreign investors are regaining their appetite for South African bonds. That tide turned last week, and continued for the first two days of this one, data compiled by the Johannesburg Stock Exchange and Bloomberg show. Average daily outflows dwindled to 300 million rand ($23 million) this month, from 1.5 billion rand in June.

Credit Risk

With the immediate risk of a full blown trade war between Washington and Beijing off the table for now, the cost of insuring South Africa’s debt against default in five years has dropped nine out of the past 13 trading days. Credit-default swaps are down 32 basis points to 184, well below those of Turkey and Brazil, from a 20-month high reached on July 2.